Back on February 12, 2009, I posted a message entitled "Commercial Mortgage Back Securities (CMBS). In that posting, I stated the following: "The time has come for the commercial real estate market to be exposed for the excesses over the past five years. CMBS will be the CDS (Credit Default Swaps) and Sub-prime Mortgages of 2008. Approximately $380 billion in commercial real estate are up for renewal/refinance/payoff during 2009. Financial institutions are holding over $1.2 trillion in commercial real estate. And unfortunately, we are just now hitting our stride in terms of the inevitable down cycle of commercial real estate."
Guess what? The "Wall Street Journal" reports today that, "Commercial real-estate loans are going sour at an accelerating pace, threatening to cause tens of billions of dollars in losses to banks already hurt by the housing downturn."
According to the article, Foresight Analytics in Oakland, Calif., estimates the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn. The research firm projects that more than 700 banks could fail as a result of their exposure to commercial real estate.
Thursday, March 26, 2009
Wednesday, March 25, 2009
IBM Eliminates Jobs in U.S. by Outsourcing to India
The "Wall Street Journal" just reported that IBM is expected to inform a large number of U.S. employees in its global-services unit that their jobs are being eliminated, with some of the work being shifted to IBM employees in India. The planned cuts show that even companies that are successfully navigating the global recession are continuing to slash costs--some of them by taking advantage of cheaper Asian labor.
It is sad but so very true. It is hard for U.S. firms to hire here when these firms can go to India and hire individuals at a fourth of the cost and are just as skills. The reason that I know that is the situation, because during my five years in the United Arab Emirates; we did exactly that when we needed computer technicians.
It is sad but so very true. It is hard for U.S. firms to hire here when these firms can go to India and hire individuals at a fourth of the cost and are just as skills. The reason that I know that is the situation, because during my five years in the United Arab Emirates; we did exactly that when we needed computer technicians.
A Significant Rally?
Thanks to the Contrary Investor, who brought the following ROC indictor to my attention, the following chart illustrates the indicator. What you see is the largest ten-day percentage advance, as measured by the ROC, in the S&P 500 since 1938. Over the last thirty years, never has there been such a 10-day move in the ROC. All other moves that even came close were major bottoms followed by incredible price advances. Why is this knowledge relevant? First, it provides evidence to the bear market rally that I have been mentioning. (See posting from the other day.) Second, we need to respect what the ROC is indicating and remain mindful that prices could rally further. Third, if this turns out to be a major Bear Market bottom, our exponential moving averages (15 and 40) will confirm it. Fourth, if this does not turn out to be a major Bear Market bottom, I would take that as being extremely bearish.
Note: Click inside of chart to enlarge it.
Note: Click inside of chart to enlarge it.
Monday, March 23, 2009
Bear Market Rally!
Wow! What a day on Wall Street. The bears were in full retreat. The S&P 500 ended the day up 7.08%. Stocks jumped across the board after the Treasury detailed its plan to relieve banks of its toxic assets.
Back on Thursday, March 19, I mentioned that the market was primed for a bear market rally. With today's move, the S&P 500 has rallied 23.5% from its March 6 low of 666.79. Is this it to the rally or do we have more to come? (Refer to the box inside the following chart of the S&P 500.)
As usual, our focus will be on the exponential moving averages. The 15-Week EMA is still below the 40-Week EMA. Therefore, any rally, as such, is just a bear market rally until the 15-Week EMA penetrates the 40-Week EMA. Stayed tuned!
Note: To enlarge, click inside the chart.
Back on Thursday, March 19, I mentioned that the market was primed for a bear market rally. With today's move, the S&P 500 has rallied 23.5% from its March 6 low of 666.79. Is this it to the rally or do we have more to come? (Refer to the box inside the following chart of the S&P 500.)
As usual, our focus will be on the exponential moving averages. The 15-Week EMA is still below the 40-Week EMA. Therefore, any rally, as such, is just a bear market rally until the 15-Week EMA penetrates the 40-Week EMA. Stayed tuned!
Note: To enlarge, click inside the chart.
China and Russia Call for New Reserve Currency
China’s central bank on Monday along with Russia proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund (IMF). And, President Obama played the fiddle while Rome burned. No, I have my stories wrong. It was Nero who fiddled, as the story goes; however, President Obama chuckled it up on the Jay Leno show while the dollar and the U.S. financial system collapses.
Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic U.S. economy would have a negative impact on China.
To replace the current system, China suggested expanding the role of special drawing rights (SDRs), which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.
Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling. These SDRs are used largely as a unit of account by the IMF and some other international organizations.
China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.
Source: Financial Times.com (March 23, 2009)
Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic U.S. economy would have a negative impact on China.
To replace the current system, China suggested expanding the role of special drawing rights (SDRs), which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.
Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling. These SDRs are used largely as a unit of account by the IMF and some other international organizations.
China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.
Source: Financial Times.com (March 23, 2009)
Friday, March 20, 2009
You Want to be a Billionaire?
Want to become a billionaire fast? Move to Zimbabwe! At one time this was one of the richest countries in Southern Africa with its vast abundance of natural resources. Back then, it was know Rhodesia. Will the U.S. become another Zimbabwe? I hope not! But at some point in time (two to three years), the Fed’s quantitative easing policy will start catching up with us in the form of massive inflation.
Fed's Major GAMBLE: Buying Long Treasury Bonds
In today's, March 20, Review and Outlook section of the "Wall Street Journal" is an excellent overview of the tremendous risk that the Fed is taking with its latest strategy of directly monetizing the federal deficits. Please take the time to read the article; because on March 18, the Fed is no-longer an independent body. The Bernanke Fed has made itself an agent of the Treasury, which means of politicians. Another very sad day for the United States of America.
"In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.
It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending.
It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys.
The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell.
The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed's balance sheet has more than doubled since September -- to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%.
The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn't reassuring on that point. It says, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight "deflation," we ended up with the housing bubble and mortgage mania.
The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit.
The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed's idea "without any prior notification to us." Mr. Bernanke, meet your new partners.
Above all, the Treasury and Congress won't be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous "Accord" of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later."
"In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.
It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending.
It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys.
The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell.
The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed's balance sheet has more than doubled since September -- to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%.
The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn't reassuring on that point. It says, "the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight "deflation," we ended up with the housing bubble and mortgage mania.
The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit.
The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed's idea "without any prior notification to us." Mr. Bernanke, meet your new partners.
Above all, the Treasury and Congress won't be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous "Accord" of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later."
Thursday, March 19, 2009
GE Says Finance Unit on Firm Ground
Top finance executives at General Electric Co. said Thursday that even in the worst scenario for the U.S. economy its finance unit should manage to break even this year and avoid having to seek a capital infusion.
Wow, I have heard these "words" before. Haven't you? Remember to "trust but verify."
Wow, I have heard these "words" before. Haven't you? Remember to "trust but verify."
U.S. to Provide $5 Billion in Aid to Auto-Parts Suppliers
The "Wall Street Journal" reports today that the Obama administration plans to announce a financing facility that would provide up to $5 billion in assistance to the country's beleaguered auto-parts suppliers, many of which are teetering on the edge of bankruptcy.
According to the Wall Street Journal, the assistance would pump money into dozens of the country's biggest suppliers to help pay for seats, axles, and other components shipped to the Big Three auto makers. These suppliers last month offered a proposal to the Treasury with three options for various financing facilities. All told, the suppliers asked for about $25 billion in lending and other assistance.
Let me get this straight, the suppliers asked for $25 billion but will only get $5 billion. So, if anything, we, as taxpayers, have a moral victory, at least for the time being. (LOL) However, I am sure that the suppliers will get everything they have requested and more!! So much for a market economy.
According to the Wall Street Journal, the assistance would pump money into dozens of the country's biggest suppliers to help pay for seats, axles, and other components shipped to the Big Three auto makers. These suppliers last month offered a proposal to the Treasury with three options for various financing facilities. All told, the suppliers asked for about $25 billion in lending and other assistance.
Let me get this straight, the suppliers asked for $25 billion but will only get $5 billion. So, if anything, we, as taxpayers, have a moral victory, at least for the time being. (LOL) However, I am sure that the suppliers will get everything they have requested and more!! So much for a market economy.
Monday, March 16, 2009
P/E: Valuing the Market
Based on 2008 as-reported earnings, the S&P 500, which closed at 756.55, has a trailing P/E of 52. The forward P/E, based on 2009 projected earnings, is 23.4, which is still overvalued from a historic basis. See the attached chart that looks at the 10-year trailing P/E for the S&P 500. At the bottom of the three worst recessions since 1929, the average ratio fell below 10. To reach that, the S&P 500 would have to sink more than 30 percent. I guess the proverbial bottom-line is don't buy just yet! And, don't get lulled into believing the coming market rally is the end of the bear market. As always, listen to what the market is saying. That is, what is our 15-week EMA and 40-week EMA saying?
Thursday, March 12, 2009
Bear Market Rally?
Since 2008, $GOLD:$NYK, which measures the relative performance of the price of gold to the price of financial stocks, has really excelled at indicating intermediate tops and bottoms in the S&P 500. Currently, this technical tool is indicating that we might be ready for some type of bear market rally. We shall see.
Tuesday, March 10, 2009
The Pundits at CNBC
This is what happens when you watch and believe the pundits on CNBC. You lose your financial shirt. And these individuals get paid big bucks!
Thursday, March 05, 2009
Quiet Time
I have been very quiet this week in posting to the blog. There really isn't too much to say that is new. It is still the same old, same old song. I really would like to say something positive, such as the market has hit bottom and good times are about to start. But it is just not in the cards. Of course, we will have a bear market rally that should rally the market by 25% to 30%. But, it will be just that, a bear market rally.
Market, as measured by the Dow Jones Industrial Average, is at a twelve (12) year low. Citigroup (C) fell below a $1 share today before closing at $1.13. Today's closing price is a 98% drop in just two years! Ouch, that really hurts, especially if you have been a long-term investor in Citigroup (C).
In regard to the mortgage market, a stunning 48 percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure. A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.
Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could run out of money (insolvent) sometime this year amid a surge in bank failures.
General Motors has warned that billions of dollars in government aid may not prevent it from running out of cash if vehicle sales do not improve soon. (Does anyone really believe that car sales are going to improve anytime soon?) Deloitte & Touche, GM's auditors, have expressed “substantial doubt” about its ability to continue as a going concern, based on continued operating losses, negative shareholders’ equity and the inability to generate sufficient cash flow. The Wall Street Journal reports that top GM executives are more open to a speedy bankruptcy reorganization financed by the government, pushing aside earlier concern that such a move would scare away so many customers the company wouldn't survive.
See what I mean by the same old, same old song. Somethings just never change. Well, tomorrow is another day. Speaking of tomorrow, median estimates are that employers cut payrolls by 650,000 last month; and the unemployment rate will surged to a 25-year high of 7.9 percent. Anything more than 650,000 lost jobs and the market has the potential of a major, major sell off. If the job number is better, the market could have a great, great day. Stay tune!
Market, as measured by the Dow Jones Industrial Average, is at a twelve (12) year low. Citigroup (C) fell below a $1 share today before closing at $1.13. Today's closing price is a 98% drop in just two years! Ouch, that really hurts, especially if you have been a long-term investor in Citigroup (C).
In regard to the mortgage market, a stunning 48 percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure. A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.
Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could run out of money (insolvent) sometime this year amid a surge in bank failures.
General Motors has warned that billions of dollars in government aid may not prevent it from running out of cash if vehicle sales do not improve soon. (Does anyone really believe that car sales are going to improve anytime soon?) Deloitte & Touche, GM's auditors, have expressed “substantial doubt” about its ability to continue as a going concern, based on continued operating losses, negative shareholders’ equity and the inability to generate sufficient cash flow. The Wall Street Journal reports that top GM executives are more open to a speedy bankruptcy reorganization financed by the government, pushing aside earlier concern that such a move would scare away so many customers the company wouldn't survive.
See what I mean by the same old, same old song. Somethings just never change. Well, tomorrow is another day. Speaking of tomorrow, median estimates are that employers cut payrolls by 650,000 last month; and the unemployment rate will surged to a 25-year high of 7.9 percent. Anything more than 650,000 lost jobs and the market has the potential of a major, major sell off. If the job number is better, the market could have a great, great day. Stay tune!
Saturday, February 28, 2009
Cap and Trade Program: An Euphuism for a New Tax
The following paragraphs are taken from John Mauldin's "Frontline Weekly Newsletter:"
"This week saw President Obama give us a budget with a projected 2009 deficit of $1.75 trillion dollars, and a massive tax increase on the "wealthy." But hidden in the details was an even larger tax increase on everyone. Obama wants to create a "Cap-and-Trade Program" for carbon emissions. (You call it what you want, but it is still a TAX.) This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government. That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately.
It will take money out of consumers' pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy.
Further, Obama's accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.
Several analysts have noted that you could tax 100% of the income of the "wealthy" and still not balance this budget. While the bottom 95% may not see their taxes rise this year, you can bet they will see them rise in the future. While the US can run multi-trillion-dollar deficits for a few years, it cannot run them for long without serious consequences for interest rates and inflation. And when our entitlement program problems hit in the middle of the next decade? You can count on higher taxes."
To become better informed about what "Cap and Trade" is all about, I have identified two sites for your perusal: Cap and Trade 101 and Emissions Trading.
"This week saw President Obama give us a budget with a projected 2009 deficit of $1.75 trillion dollars, and a massive tax increase on the "wealthy." But hidden in the details was an even larger tax increase on everyone. Obama wants to create a "Cap-and-Trade Program" for carbon emissions. (You call it what you want, but it is still a TAX.) This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government. That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately.
It will take money out of consumers' pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy.
Further, Obama's accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.
Several analysts have noted that you could tax 100% of the income of the "wealthy" and still not balance this budget. While the bottom 95% may not see their taxes rise this year, you can bet they will see them rise in the future. While the US can run multi-trillion-dollar deficits for a few years, it cannot run them for long without serious consequences for interest rates and inflation. And when our entitlement program problems hit in the middle of the next decade? You can count on higher taxes."
To become better informed about what "Cap and Trade" is all about, I have identified two sites for your perusal: Cap and Trade 101 and Emissions Trading.
Thursday, February 26, 2009
Nearly a TRILLION DOLLARS in New Taxes
ABC News reports that President Obama's budget proposes $989 billion in new taxes over the course of the next 10 years, starting in fiscal year 2011, most of which are tax increases on individuals.
1) For individuals making more than $250,000, the allocation is as follows:
$338 billion - Bush tax cuts expire
$179 billlion - eliminate itemized deduction
$118 billion - capital gains tax hike
Total: $636 billion/10 years
2) For business, the allocation is as follows:
$17 billion - Reinstate Superfund taxes
$24 billion - tax carried-interest as income
$5 billion - codify "economic substance doctrine"
$61 billion - repeal LIFO
$210 billion - international enforcement, reform deferral, other tax reform
$4 billion - information reporting for rental payments
$5.3 billion - excise tax on Gulf of Mexico oil and gas
$3.4 billion - repeal expensing of tangible drilling costs
$62 million - repeal deduction for tertiary injectants
$49 million - repeal passive loss exception for working interests in oil and natural gas properties
$13 billion - repeal manufacturing tax deduction for oil and natural gas companies
$1 billion - increase to 7 years geological and geophysical amortization period for independent producers
$882 million - eliminate advanced earned income tax credit
Total: $353 billion/10 years
1) For individuals making more than $250,000, the allocation is as follows:
$338 billion - Bush tax cuts expire
$179 billlion - eliminate itemized deduction
$118 billion - capital gains tax hike
Total: $636 billion/10 years
2) For business, the allocation is as follows:
$17 billion - Reinstate Superfund taxes
$24 billion - tax carried-interest as income
$5 billion - codify "economic substance doctrine"
$61 billion - repeal LIFO
$210 billion - international enforcement, reform deferral, other tax reform
$4 billion - information reporting for rental payments
$5.3 billion - excise tax on Gulf of Mexico oil and gas
$3.4 billion - repeal expensing of tangible drilling costs
$62 million - repeal deduction for tertiary injectants
$49 million - repeal passive loss exception for working interests in oil and natural gas properties
$13 billion - repeal manufacturing tax deduction for oil and natural gas companies
$1 billion - increase to 7 years geological and geophysical amortization period for independent producers
$882 million - eliminate advanced earned income tax credit
Total: $353 billion/10 years
GM Posts $9.6 Billion Loss, Burns Through $6.2 Billion in Cash
For the year, GM lost $30.9 billion, the second biggest loss in the auto maker's 100-year history.
The Wall Street Journal reports that GM is awaiting word from its auditors as to whether the company must be labeled a "going concern" in filings to the U.S. Securities and Exchange Commission, a judgment that casts doubt on the company's ability to survive. The determination is expected in March.
The Wall Street Journal reports that GM is awaiting word from its auditors as to whether the company must be labeled a "going concern" in filings to the U.S. Securities and Exchange Commission, a judgment that casts doubt on the company's ability to survive. The determination is expected in March.
Wednesday, February 25, 2009
The Numbers
What can I say? Absolutely nothing. It is indeed a very sorry state of affairs to what has happen to our country and our economy.
Source: Evil Speculator (To enlarge, double click inside the graph.)
"One would be amazed at how fast financial capital can flee its borders if you try to tax it unfairly. The last thing the U.S. needs is capital flight." Compliments of the "Financial Ninja."
Source: Evil Speculator (To enlarge, double click inside the graph.)
"One would be amazed at how fast financial capital can flee its borders if you try to tax it unfairly. The last thing the U.S. needs is capital flight." Compliments of the "Financial Ninja."
Monday, February 23, 2009
Twelve Years of Market Gains -- GONE!
The S&P 500 could not hold above the 800-825 support levels on a weekly basis. See the following chart. (To enlarge, double-click inside it.) By penetrating the 800 price level definitely has the bears firmly in control of this market. I still expect a bear-market rally, which will give me an opportunity to purchase some double-inverse ETFs, such as SDS, DXD, and QID.
Yes, it is dire, especially for those investors who are still in equities. For us, we have been kept completely out of "harms way" since January 8, 2008.
Yes, it is dire, especially for those investors who are still in equities. For us, we have been kept completely out of "harms way" since January 8, 2008.
Thursday, February 19, 2009
Santelli’s Tea Party
I am not a big fan of CNBC, but I loved this segment! Anyone want to toss a few "derivatives, credit default swaps, and sub-prime mortgages"into Lake Michigan this summer?
Mortgage Bailout
The mortgage bailout has earmarked $75 billion to go to approximately 9 to 10 million households, but the real dollar extent of the bailout is probably going to be in the neighborhood of at least $200 to $300 billion. Like all the other bailouts, no one really knows the true dollar magnitude of what it will cost the American taxpayer. Unfortunately, it has already been proven that more than 60% of mortgages that were modified previously failed within six months. That is the problem, and this bailout will have the same likely consequences. Is Congress really incapable of thinking through all the negative ramifications of this dire bailout? I know, what a stupid question!
Let me get directly to the point why this bailout is bad for potential homeowners and lenders alike. Here it is: "President Obama said he will support revamping U.S. bankruptcy rules to let judges reduce mortgages on primary residences to fair market value as long as borrowers pay their debts under a court-ordered plan." Why is this proposal bad? Let me respond to my rhetorical question with an example. Let's assume as a private lender, I had loaned you $250,000 to purchase a home back in 2006. Today, you file bankruptcy and petition the bankruptcy judge that the home is no longer appraised at $250,000 but $150,000. You tell the judge that you can afford the P&I payments on $150,000 but not $250,000. The bankruptcy judge agrees and reducing the mortgage to $150,000. Who is the loser on this financial arrangement? Of course, I am, as the lender, not you, as the borrower. I have just lost $100,000, but you get to keep the house and have your principal balance outstanding reduce from $250,000 to $150,000. As a lender, do you think that I am going to make any more home loans? Probably not. In other words, availability of credit for mortgage money will be greatly reduced. If I do decide to lend, I will want to be compensated for the increased risk of some bankruptcy judge reducing the principal that is due me. This simply means that mortgage rates will go up dramatically! There you have the consequences of this bailout: reduce mortgage credit from the private sector and higher mortgage rates. Great isn't it? But then again, there is any such thing as a "free lunch."
Let me get directly to the point why this bailout is bad for potential homeowners and lenders alike. Here it is: "President Obama said he will support revamping U.S. bankruptcy rules to let judges reduce mortgages on primary residences to fair market value as long as borrowers pay their debts under a court-ordered plan." Why is this proposal bad? Let me respond to my rhetorical question with an example. Let's assume as a private lender, I had loaned you $250,000 to purchase a home back in 2006. Today, you file bankruptcy and petition the bankruptcy judge that the home is no longer appraised at $250,000 but $150,000. You tell the judge that you can afford the P&I payments on $150,000 but not $250,000. The bankruptcy judge agrees and reducing the mortgage to $150,000. Who is the loser on this financial arrangement? Of course, I am, as the lender, not you, as the borrower. I have just lost $100,000, but you get to keep the house and have your principal balance outstanding reduce from $250,000 to $150,000. As a lender, do you think that I am going to make any more home loans? Probably not. In other words, availability of credit for mortgage money will be greatly reduced. If I do decide to lend, I will want to be compensated for the increased risk of some bankruptcy judge reducing the principal that is due me. This simply means that mortgage rates will go up dramatically! There you have the consequences of this bailout: reduce mortgage credit from the private sector and higher mortgage rates. Great isn't it? But then again, there is any such thing as a "free lunch."
Wednesday, February 18, 2009
Heaven Help Us!
1. What a surprise for GM and Chrysler having to come back for more money. I am shocked. However, I am looking forward to driving that 2012 Aztec, or whatever they going to call it. (LOL)
2. Dream on! The only thing that it will create is MORE debt! Welcome to the permanent world of federal deficits in excess of $1 trillion a year. So much for the American dream.
3. We are bailing out everyone else. Why not homeowners? God helps us.
4. Money isn't worth anything, so what's the big deal?
5. That statement is indeed true.
Source: Tim Knight at Slope of Hope
Tuesday, February 17, 2009
S&P 500 Breaks 800
S&P 500 has decisively penetrated the 800-825 levels. Since I track the S&P 500 on a weekly basis (Friday's close), Friday's closing price becomes a pivotal day. Not that it matters to us, because we have been out of the market for over a year (January 8, 2008).
So far today, SRS is up $8.14(11.84%), QID is up $3.51 (6.70%), TLT is up $2.52 (2.46%), and gold is up $28 (3.12%). I guess I have been way too bearish on the yellow metal. But then again, I know it is extremely overbought at these levels. In other words, I am still looking for a pull back. Maybe I will be singing this same old song all the way to $1,500. I hope not.
So far today, SRS is up $8.14(11.84%), QID is up $3.51 (6.70%), TLT is up $2.52 (2.46%), and gold is up $28 (3.12%). I guess I have been way too bearish on the yellow metal. But then again, I know it is extremely overbought at these levels. In other words, I am still looking for a pull back. Maybe I will be singing this same old song all the way to $1,500. I hope not.
Sunday, February 15, 2009
UAW Objects to GM, Chrysler Plan as Deadline Nears
Bloomberg reports that the United Auto Workers union is objecting to proposals from GM and Chrysler to modify a retiree health-care fund as required by the U.S. so the automakers can keep the $17.4 billion bail-out. The UAW stopped negotiations with GM yesterday. However, Chrysler still is talking to the UAW, though the talks haven’t been substantive.
I don't know what Ron Gettlefinger and the UAW think they're going to accomplish with this tactic. Maybe they believe that President Obama is in their "hip-pocket," and his administration will never allow the auto industry to fail. Time will tell.
Let me point out a few things that the auto employees and union members don't seem to understand (Denninger):
1. If GM and thus its pension fund goes "belly-up," the Pension Benefit Guaranty Corporation (PBGC) will be forced to step in and take it over. PERIOD The PBGC has maximum benefits that it pays out to retirees. (PERIOD) If a retiree is getting more than what the PBGC allows, too bad. (PERIOD) How does a 50% to 75% reduction in one's promised pension benefits sound and complete elimination of all post-retirement or post-layoff private health insurance, leaving one with nothing until you can qualify for Medicare?
2. If the Voluntary Employees Beneficiary Association Plan (VEBA) is unable to be funded, too bad. Pension funding under the PBGC does not include "all expenses paid" health insurance. Once again, welcome to Medicare, when you are old enough to qualify. Until then, you fund it yourself.
3. The PBGC guarantees are much more limited than your GM/UAW pension, especially if you're not already retired. The cap is based on the law, not your contributions to date, and is invoked at the time the plan goes "belly-up". If you're under 55, you will get exactly nothing, with the maximum amount set by law, disregarding (for the most part) your contributions to the system.
I am not sure that the rank-and-file members fully comprehend or understand the above three points. And if you think that the government won't force Chapter 11 with the government providing Debtor-In-Possession Financing (DIP), you better think again.
I am aware that President Obama is a strong friend of organized labor, and so are some Americans. But very few are friends of the UAW outside of its membership, and that is a serious problem for the UAW.
Resources: Bloomberg News and Karl Denninger at the Market Ticker
I don't know what Ron Gettlefinger and the UAW think they're going to accomplish with this tactic. Maybe they believe that President Obama is in their "hip-pocket," and his administration will never allow the auto industry to fail. Time will tell.
Let me point out a few things that the auto employees and union members don't seem to understand (Denninger):
1. If GM and thus its pension fund goes "belly-up," the Pension Benefit Guaranty Corporation (PBGC) will be forced to step in and take it over. PERIOD The PBGC has maximum benefits that it pays out to retirees. (PERIOD) If a retiree is getting more than what the PBGC allows, too bad. (PERIOD) How does a 50% to 75% reduction in one's promised pension benefits sound and complete elimination of all post-retirement or post-layoff private health insurance, leaving one with nothing until you can qualify for Medicare?
2. If the Voluntary Employees Beneficiary Association Plan (VEBA) is unable to be funded, too bad. Pension funding under the PBGC does not include "all expenses paid" health insurance. Once again, welcome to Medicare, when you are old enough to qualify. Until then, you fund it yourself.
3. The PBGC guarantees are much more limited than your GM/UAW pension, especially if you're not already retired. The cap is based on the law, not your contributions to date, and is invoked at the time the plan goes "belly-up". If you're under 55, you will get exactly nothing, with the maximum amount set by law, disregarding (for the most part) your contributions to the system.
I am not sure that the rank-and-file members fully comprehend or understand the above three points. And if you think that the government won't force Chapter 11 with the government providing Debtor-In-Possession Financing (DIP), you better think again.
I am aware that President Obama is a strong friend of organized labor, and so are some Americans. But very few are friends of the UAW outside of its membership, and that is a serious problem for the UAW.
Resources: Bloomberg News and Karl Denninger at the Market Ticker
Saturday, February 14, 2009
ETFs in Review
On Wednesday (February 11), I discussed the Commercial Mortgage Backed Securities (CMBS) and isolated on SRS (ProShares Ultra-Short Real Estate ETF). So far, the market agrees in that the price on the open on February 11 was $60.35. SRS closed Friday at $68.76. So far, so good.
On Thursday (February 12), I noted that GLD (gold) was near-term overbought at $93.17. GLD closed Friday at $92.55. [Note: Long-term, I am very bullish on gold.] In regard to the other metal, silver (SLV), I noted (February 13) it was also near-term overbought at $13.16. On Friday, it closed at $13.54. For both GLD and SLV, I anticipate a short-term price correction.
In the bond area, I stated on Thursday (February 12) that TLT (ETF on 20+ TSY Bonds) is getting close to a near-term buy. On Friday, it closed at $102.41. I would like to the price to test its 200-Day EMA at $100. We may see it this coming week.
For the coming week, I am looking very closing at QID (ProShares UltraShort on QQQ) for a possible buy signal this week. The chart on QID is as follows:
Note: To enlarge, double-click inside the chart.
On Thursday (February 12), I noted that GLD (gold) was near-term overbought at $93.17. GLD closed Friday at $92.55. [Note: Long-term, I am very bullish on gold.] In regard to the other metal, silver (SLV), I noted (February 13) it was also near-term overbought at $13.16. On Friday, it closed at $13.54. For both GLD and SLV, I anticipate a short-term price correction.
In the bond area, I stated on Thursday (February 12) that TLT (ETF on 20+ TSY Bonds) is getting close to a near-term buy. On Friday, it closed at $102.41. I would like to the price to test its 200-Day EMA at $100. We may see it this coming week.
For the coming week, I am looking very closing at QID (ProShares UltraShort on QQQ) for a possible buy signal this week. The chart on QID is as follows:
Note: To enlarge, double-click inside the chart.
S&P 500: Weekly Update
The 800-825 support continues to be the "line-in-the-sand." Stimulus bill has been approved by Congress and President Obama will sign it into law on Tuesday. According to conventional wisdom, we buy the rumor and sell the news. Therefore, I guess Tuesday, (markets are closed on Monday) will be a very interesting day. Also, the Federal Open Market Committee (FOMC) meets this coming week.
GM is reporting in Saturday's WSJ that it will offer Congress two choices: Bankruptcy or More Billions. Is anyone really surprised by GM asking for more BILLIONS? According to the WSJ, the Treasury reports that GM probably needs an additional $5 billion to continue its operations beyond the first quarter. Of course, the thorn in this entire process is the "legacy cost."
Note: To enlarge, double-click inside the chart. Note: To enlarge, double-click inside the chart.
GM is reporting in Saturday's WSJ that it will offer Congress two choices: Bankruptcy or More Billions. Is anyone really surprised by GM asking for more BILLIONS? According to the WSJ, the Treasury reports that GM probably needs an additional $5 billion to continue its operations beyond the first quarter. Of course, the thorn in this entire process is the "legacy cost."
Note: To enlarge, double-click inside the chart. Note: To enlarge, double-click inside the chart.
Friday, February 13, 2009
Silver (SLV)
Silver, like gold, has reached short-term overbought conditions. Expect price weakness near term. Long-term, I am very positive on silver and gold.
Note: To enlarge chart, double-click inside.
Note: To enlarge chart, double-click inside.
Thursday, February 12, 2009
Gold: Near Term Price Action
Note: To enlarge, double click inside chart.
Even though I am long-term bullish on this metal, I do expect near term weakness to the $850-$880. $850 is major support.
Commercial Mortgage Backed Securities (CMBS)
Commercial Mortgage Backed Securites (CMBS) have not yet received enough attention amidst the bailout mania of the moment that is focused entirely on the financial institutions and residential real estate. However, that will change in 2009 as the macro-deleveraging process continues. The time has come for the commercial real estate market to be exposed for the excesses over the past five years. CMBS will be the CDS (Credit Default Swaps) and Sub-prime Mortgages of 2008.
Approximately $380 billion in commercial real estate are up for renewal/refinance/payoff during 2009. Financial institutions are holding over $1.2 trillion in commercial real estate. And unfortunately, we are just now hitting our stride in terms of the inevitable down cycle of commercial real estate. The "Contrary Investor" states that the commercial real estate cycle has followed the residential real estate cycle with an approximate 18-24 month time-lag period.
Many of the commercial real estate loans up for renewal were financed at incredibly high valuations (wasn't everything over the past five years) relative to now deteriorating per square footage rental rate prospects. The reason for the drop in the per square footage rental rates is the commercial real estate property vacancy rates are rising dramatically.
How does one take advantage of the potential CMBS debacle? My vehicle (stock) of choice is SRS, which is ProShares Ultra-Short Real Estate ETF. This vehicle rises as the value of real estate declines and, of course, vice-a-versa. It closed yesterday at $60.35. A chart of SRS is as follows:
Approximately $380 billion in commercial real estate are up for renewal/refinance/payoff during 2009. Financial institutions are holding over $1.2 trillion in commercial real estate. And unfortunately, we are just now hitting our stride in terms of the inevitable down cycle of commercial real estate. The "Contrary Investor" states that the commercial real estate cycle has followed the residential real estate cycle with an approximate 18-24 month time-lag period.
Many of the commercial real estate loans up for renewal were financed at incredibly high valuations (wasn't everything over the past five years) relative to now deteriorating per square footage rental rate prospects. The reason for the drop in the per square footage rental rates is the commercial real estate property vacancy rates are rising dramatically.
How does one take advantage of the potential CMBS debacle? My vehicle (stock) of choice is SRS, which is ProShares Ultra-Short Real Estate ETF. This vehicle rises as the value of real estate declines and, of course, vice-a-versa. It closed yesterday at $60.35. A chart of SRS is as follows:
Wednesday, February 11, 2009
The Massive Tax Break for American Workers: $13 More Per Week
This mega-dollar amount of $13 should begin showing up in most workers' paychecks in June 2009; however, it will fall to about $8 a week next January 2010. Please don't spend it all in one place. Spread it around!!!!
Tuesday, February 10, 2009
Funds for Bank Programs May Reach an Addition $2 Trillion Bailout
Treasury Secretary Geithner unveiled a stepped-up program today to stabilize (LOL) the financial system including an initial fund of $500 billion to absorb toxic assets.
The plan includes a public-private partnership aimed at soaking up toxic assets that are in the financial system. It also includes new efforts to boost consumer lending, limit home foreclosures and provide new capital for banks.
Now, let's look at this public-private partnership whereby the government will start with an initial $500 billion to get rid of all that toxic waste that lies within the balance sheets of our financial institutions. This is the good part, especially if you are a hedge fund. As the hedge fund, the government provides you with 95% non-recourse financing (presumably very cheaply), whereby you only have to put up 5% of the face value. In return, you get a 7% coupon, which means that in one year you have recouped your investment, and in two you are making money like a madman, up 200% or more on their original risk capital. Example: You purchase $100 million of the stuff with only a 5% investment, or $5 million. If the coupon is 6%, you receive $6 million ($100 million x 6%) at the end of the year; and, if the cash flow continues in the second year, you have some great profits. But what happens when these instruments default? (I am sure they will default.) The Treasury winds up eating the entire face value, while the hedge fund is completely off the hook and has made off with all of the coupon money in the meantime. Boy, is this a sweet deal. Wish I had a spare billion or two!
The plan includes a public-private partnership aimed at soaking up toxic assets that are in the financial system. It also includes new efforts to boost consumer lending, limit home foreclosures and provide new capital for banks.
Now, let's look at this public-private partnership whereby the government will start with an initial $500 billion to get rid of all that toxic waste that lies within the balance sheets of our financial institutions. This is the good part, especially if you are a hedge fund. As the hedge fund, the government provides you with 95% non-recourse financing (presumably very cheaply), whereby you only have to put up 5% of the face value. In return, you get a 7% coupon, which means that in one year you have recouped your investment, and in two you are making money like a madman, up 200% or more on their original risk capital. Example: You purchase $100 million of the stuff with only a 5% investment, or $5 million. If the coupon is 6%, you receive $6 million ($100 million x 6%) at the end of the year; and, if the cash flow continues in the second year, you have some great profits. But what happens when these instruments default? (I am sure they will default.) The Treasury winds up eating the entire face value, while the hedge fund is completely off the hook and has made off with all of the coupon money in the meantime. Boy, is this a sweet deal. Wish I had a spare billion or two!
Monday, February 09, 2009
General Motors to Invest $1 Billion in Brazil Operations -- Money to Come from U.S. Rescue Program
According to to to the Latin American Herald Tribune, "General Motors plans to invest $1 billion in Brazil to avoid the kind of problems the U.S. automaker is facing in its home market, said the beleaguered car maker.
According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the U.S. government and will be used to "complete the renovation of the line of products up to 2012."
So much for using U.S. taxpayer dollars to generate jobs here in America. Thank you Congress and General Motors.
According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the U.S. government and will be used to "complete the renovation of the line of products up to 2012."
So much for using U.S. taxpayer dollars to generate jobs here in America. Thank you Congress and General Motors.
Sunday, February 08, 2009
S&P 500: Weekly Update
Note: To enlarge, double click inside the chart.
Game plan for this week is the same as last week. That is continue to watch the 800-825 levels on the S&P 500.
National Debt: Argentina Here We Come!!!!
Tim Knight over at the "Slope of Hope" blog states that the "U.S. National Debt was $930 billion in 1980, or 33 percent of GDP. Today, it is $10.7 trillion, or 76 percent of GDP. The National Debt has grown by 1,150 percent in 28 years. With the planned fiscal stimulus (taxing future generations), the National Debt will reach 100 percent of GDP during the Obama administration. When Argentina's economy collapsed in 1998, their National Debt as a percentage of GDP was 65 percent. The Great Deniers say we are not Argentina. They say we are safe because the U.S. dollar is the reserve currency of the world. This is like jumping off a 20 story building and as you pass the 10th floor someone yells out the window asking how you are doing. You answer, "Good, so far"."
Thursday, February 05, 2009
President Obama: The Paper Tiger
President Obama has set executive pay limits for bailout companies. Sounds good, doesn't it taxpayers? That is what the perception one would have had by listening and reading the news yesterday. However, perception is not always reality. Bloomberg reports, "Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced yesterday by President Obama.
The rules will apply only to top executives at companies that need “exceptional” assistance in the future. The limits aren’t retroactive, meaning firms that have already taken government money won’t be subject to the restrictions unless they have to come back for more."
In other words, these new compensation rules will not have much effect at all!!!
The rules will apply only to top executives at companies that need “exceptional” assistance in the future. The limits aren’t retroactive, meaning firms that have already taken government money won’t be subject to the restrictions unless they have to come back for more."
In other words, these new compensation rules will not have much effect at all!!!
Wednesday, February 04, 2009
Five Myths About the Great Depression
The current financial crisis has many in Congress petitioning and requesting another "New Deal." Those individuals should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and almost five years into Roosevelt's New Deal.
Andrew Wilson's five myths are as follows:
1. Herbert Hoover, elected President in 1928, was a laissez-faire Republican who clung to the idea that markets were basically self-correcting.
2. The stock market crash in October 1929 precipitated the Great Depression.
3. Where the market had failed, the government stepped in to protect ordinary people.
4. Greed caused the stock market to be overvalued and then crash.
5. Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight.
Now, read Andrew Wilson's Five Myths About the Great Depression and explain the five myths. Also, who was Henry Morganthau and what was the significance of his comments to Congressional Democrats in May 1939?
Andrew Wilson's five myths are as follows:
1. Herbert Hoover, elected President in 1928, was a laissez-faire Republican who clung to the idea that markets were basically self-correcting.
2. The stock market crash in October 1929 precipitated the Great Depression.
3. Where the market had failed, the government stepped in to protect ordinary people.
4. Greed caused the stock market to be overvalued and then crash.
5. Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight.
Now, read Andrew Wilson's Five Myths About the Great Depression and explain the five myths. Also, who was Henry Morganthau and what was the significance of his comments to Congressional Democrats in May 1939?
Make or Break Time
These are the current "support" numbers for the following indexes:
1. S&P - 800
2. Dow - 8,000
3. Transports - 3,000
4. NASDAQ Composition - 1,500
5. NASDAQ 100 - 1,200
6. OEX - 400
7. Gold (spot price) - 900 (Resistance)
These levels must hold for the "Bulls." If not, the "Bears" will take firm control, and prices will be significantly lower. Once again, our long-term investors remain in cash per our original sell signal in "January 8, 2008." No, that is not 2009. January 8, 2008 is the correct date that my readers moved from equities to money market instruments per my Exponential Moving Average strategy.
1. S&P - 800
2. Dow - 8,000
3. Transports - 3,000
4. NASDAQ Composition - 1,500
5. NASDAQ 100 - 1,200
6. OEX - 400
7. Gold (spot price) - 900 (Resistance)
These levels must hold for the "Bulls." If not, the "Bears" will take firm control, and prices will be significantly lower. Once again, our long-term investors remain in cash per our original sell signal in "January 8, 2008." No, that is not 2009. January 8, 2008 is the correct date that my readers moved from equities to money market instruments per my Exponential Moving Average strategy.
Sunday, February 01, 2009
Bear Continues: 15-Week EMA Still Below the 40-Week EMA
An update of the 15- and 40-Week EMAs is illustrated in the following chart. Keep-in-mind that as long as the 15-Week EMA is below the 40-Week EMA, a bear market remains in tact. However, I want to draw you attention to the two boxes in blue. The first box depicts the 2002-03 price activity prior to the start of the bull market that culminated in late 2007, and the second depicts the recent price activity. The recent price activity is similar in many aspects to the 2002-03 period. Am I saying that we are on the brink of the start of a new bull market? No, I will let the EMAs tell me when that will occur. However, the 800 level on the S&P 500 must hold. If not, we could see a major sell off that would probability take it to 600.
Thursday, January 29, 2009
Ford Burns $5.5 Billion in Cash During the 2008 Fourth Quarter
Bloomberg reports that Ford Motor, the only U.S. automaker shunning federal loans, burned $5.5 billion in cash in the fourth quarter; and said it will tap a revolving credit line after the worst annual performance in its 105-year history.
Now, I had wondered how Ford could shun all that government money that GM and Chrysler had taken so willingly. My original thought was that maybe Ford did have a "better business model in play." I should have knew better. Ford's business model is no better, might be worse, than GM and Chrysler. The reason why Ford managed to forgo all that governmental money is that its CEO, Alan Mulally, decided to borrow $23 billion in 2006 by securitizing ALL of Ford's assets, including its trademark "blue oval logo." Oh, that was a brilliant strategy to hock anything, even the logo, by going further into debt!
Now, I had wondered how Ford could shun all that government money that GM and Chrysler had taken so willingly. My original thought was that maybe Ford did have a "better business model in play." I should have knew better. Ford's business model is no better, might be worse, than GM and Chrysler. The reason why Ford managed to forgo all that governmental money is that its CEO, Alan Mulally, decided to borrow $23 billion in 2006 by securitizing ALL of Ford's assets, including its trademark "blue oval logo." Oh, that was a brilliant strategy to hock anything, even the logo, by going further into debt!
Wednesday, January 28, 2009
Enron and the Treasury Department: What do they have in common?
An excellent post by Tim Knight over at the "Slope of Hope" is quoted below for your reading enlightenment. He states that there is no way to for you and me to sell these toxic assets that the Treasury will be acquiring for us as taxpayers. I believe there is a way for investors through buying the following inverse ETFs: UDN (Dollar Short Position), TBT (TSY Bond -- 20-Year Maturity Short Position, and PST (TSY Bond -- 10-Year Maturity Short Position). And, of course, the purchase of gold and silver, either the bullion or the ETFs, GLD and SLV.
"Even though seven years have passed, Enron is probably a company whose scandal you remember. The simplified version is something like this: you had an organization which:
1. Had some performing assets and some very bad investments;
2. Set up some "off-balance partnerships" into which they could move the bad investments;
3. Propped up an untenable situation by leaving only the good stuff, thus creating the illusion of prosperity
So I ask you this: what is the difference between what Enron did and what the US Government is about to do with the "bad bank" proposal? Remember, people went to prison or put bullets through their own heads because of Enron.
Indeed, I would say what Enron did was actually better than what the Feds are proposing, because at least those who suffered due to the fraud did so at their own choosing. In other words, they elected to buy (and hold on to) Enron stock. ENE was falling a long, long time before the scandal broke and the stock truly collapsed. Anyone with even the most basic knowledge of a chart would have exited ENE safely.
The bad bank, however, forces the entire country to be saddled with toxic "assets." There isn't a way to sell.
I don't imagine anyone is going to wind up going to prison over this one. It's a million times worse than Enron ever was."
Look at the following chart of Enron.
Doesn't the chart look a whole lot like many of the current financial charts?
"Even though seven years have passed, Enron is probably a company whose scandal you remember. The simplified version is something like this: you had an organization which:
1. Had some performing assets and some very bad investments;
2. Set up some "off-balance partnerships" into which they could move the bad investments;
3. Propped up an untenable situation by leaving only the good stuff, thus creating the illusion of prosperity
So I ask you this: what is the difference between what Enron did and what the US Government is about to do with the "bad bank" proposal? Remember, people went to prison or put bullets through their own heads because of Enron.
Indeed, I would say what Enron did was actually better than what the Feds are proposing, because at least those who suffered due to the fraud did so at their own choosing. In other words, they elected to buy (and hold on to) Enron stock. ENE was falling a long, long time before the scandal broke and the stock truly collapsed. Anyone with even the most basic knowledge of a chart would have exited ENE safely.
The bad bank, however, forces the entire country to be saddled with toxic "assets." There isn't a way to sell.
I don't imagine anyone is going to wind up going to prison over this one. It's a million times worse than Enron ever was."
Look at the following chart of Enron.
Doesn't the chart look a whole lot like many of the current financial charts?
Marcus Tullius Cicero: Dated 55 B.C.
The following quote illustrates how wise we've become over the ensuing two-thousand year. "LOL"
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."
Two-thousand years and "nothing" has changed. "Those who cannot remember the past are condemned to repeat it." -- George Santayana, The Life of Reason, Volume 1, 1905
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."
Two-thousand years and "nothing" has changed. "Those who cannot remember the past are condemned to repeat it." -- George Santayana, The Life of Reason, Volume 1, 1905
Monday, January 26, 2009
What Is an American Car?
"Could there be a more American vehicle than a "Jeep Patriot?" Nothing on four wheels says American more proudly than Jeep, the rugged brand that helped America win World War II, and has ferried millions into our wild, Western spaces since. Yes, in fact, there could be a more American SUV than a Jeep Patriot. A Toyota Sequoia would be one of them. The Sequoia is 80% "domestic" according to the National Highway Traffic Safety Administration, while the Jeep Patriot is only 66%.
Once you put down the flags and shut off all the television ads with their Heartland, apple-pie America imagery, the truth of the car business is that it transcends national boundaries. A car or truck sold by a "Detroit" auto maker such as GM, Ford or Chrysler could be less American -- as defined by the government's standards for "domestic content" -- than a car sold by Toyota, Honda or Nissan -- all of which have substantial assembly and components operations in the U.S.
GM, the most global of the companies with headquarters in Detroit, has highlighted to investors that it now sells more cars (and has more employees) outside the U.S., and that its best opportunities for growth -- assuming the company's restructuring is successful -- are in China, Latin America and other developing markets.
So what should you buy if you want to buy a truly American-made car? For the 2008 model year, the government says the Ford Crown Victoria has the highest percentage of U.S./Canada content at 90%. The only hitch: It's assembled in Canada."
For the rest of the article go to the Wall Street Journal. Make sure you take the car quiz and see if you are smarter than a fifth grader.
Once you put down the flags and shut off all the television ads with their Heartland, apple-pie America imagery, the truth of the car business is that it transcends national boundaries. A car or truck sold by a "Detroit" auto maker such as GM, Ford or Chrysler could be less American -- as defined by the government's standards for "domestic content" -- than a car sold by Toyota, Honda or Nissan -- all of which have substantial assembly and components operations in the U.S.
GM, the most global of the companies with headquarters in Detroit, has highlighted to investors that it now sells more cars (and has more employees) outside the U.S., and that its best opportunities for growth -- assuming the company's restructuring is successful -- are in China, Latin America and other developing markets.
So what should you buy if you want to buy a truly American-made car? For the 2008 model year, the government says the Ford Crown Victoria has the highest percentage of U.S./Canada content at 90%. The only hitch: It's assembled in Canada."
For the rest of the article go to the Wall Street Journal. Make sure you take the car quiz and see if you are smarter than a fifth grader.
Lending Drops at Big U.S. Banks
The "Wall Street Journal" reports that "lending at many of the nation's largest banks fell in recent months, even after they received $148 billion in taxpayer capital that was intended to help the economy by making loans more readily available.
Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results."
What is happening is deleveraging. That is, financial institutions are writing off toxic loans; businesses are paying off loans; and consumers are paying off loans. In other words, no loan demand. Further evidence that deleveraging is alive and well is that CNN reports that 87% of respondents to a recent poll would pay down debt or save it if they would receive a $500 tax credit. Bottom line, no one wants to take on additional debt!
Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results."
What is happening is deleveraging. That is, financial institutions are writing off toxic loans; businesses are paying off loans; and consumers are paying off loans. In other words, no loan demand. Further evidence that deleveraging is alive and well is that CNN reports that 87% of respondents to a recent poll would pay down debt or save it if they would receive a $500 tax credit. Bottom line, no one wants to take on additional debt!
Friday, January 23, 2009
Ownership of Treasury Debt and Its Potential 2009 Impact on the Dollar
The following comments are from the January 21 post of the “Contrary Investor,” whom I have quoted from in previous posts. I totally agree with his hypothesis that the 2009 financial story will be the dollar. And, it has all of the potential of being a horror story. At the end of the article, I will provide several investment vehicles, which would enhance your financial portfolio in a dollar-weakening environment. Of course, I will be monitoring these investments over the course of 2009.
“Without question, the most important foreign buyer of US Treasuries decade to date has been China. Although Japan is a meaningful holder, it has been a much lesser force in supporting Treasury prices decade to date than has China. We’ve told you in the past that we believe UK numbers are in large part petro money floating through one of many global financial centers that is London. Secondly, London in part and the Caribbean in better part comprise hedge fund territory. The folks currently trying to front run the Fed? Maybe. As we’ve also discussed in the past, OPEC, Brazil and Russia have one very important characteristic in common with their main land Chinese brethren – they have been on the other side of the massive US trade deficit during the current decade that is now beginning to contract. Very important recipients of trade related US dollars that have so obligingly recycled those dollars back into US Treasuries, as well as US agency and corporate debt until recently (for very obvious reasons). Looking forward, two issues stand out as we question, “who’s the next buyer?” As we question how the US will fund itself in the wholesale global capital markets, if you will. The table above shows us directly how the US funded itself decade to date. How about looking ahead?
Simply stated, we believe the question of how and at what cost the US government funds its debt expansion ahead is quite the relevant watch point in 2009. China holds a very key seat at the decision-making and ultimate outcome table. Recent Treasury yields (or lack thereof) have already reached an extreme, and as such are unsustainable. Bernanke is on record stating the Fed will buy Treasury debt if need be. Clearly, whether he realizes this or not, the markets will hold him to that statement. In fact, this may become one of Bernanke and Company’s most meaningful “tests” in the year ahead. Choosing to inflate/reflate, the Fed cannot allow nominal Treasury yields to climb meaningfully, as such we believe the financial market relief valve by default will ultimately be the US dollar. The path appears very clear. It’s only the acceleration along the path that remains in question if you ask us.
Trading Places...As we mentioned above, we need to keep a sharp eye on China as we move ahead. You know we'll be monitoring their activities in terms of capital flows, especially their Treasury purchases. But this data comes to us with a multi-month lag. So as we look ahead, we need to be mindful of combining data anecdotes in trying to anticipate change in global capital flows. Again, the reason we've spent so much time on this topic in this discussion is that any meaningful change in global capital flows into Treasuries will hopefully allow us to time a point at which Fed Treasury monetization becomes a significant reality. We know they are already monetizing alternative assets such as mortgage backed securities, commercial paper, etc. But we simply cannot see how global debt and currency markets will not sit up and take meaningful notice when Treasury monetization begins.
We hope you've noticed recent "comments" being made in the Chinese press. A number of differing officials from a number of differing Chinese government departments have alluded to dollar weakness going forward. We suggest this is no coincidence. The Chinese are "telling us" this is what they expect. Like their US official brethren, the Chinese government is "encouraging" domestic banks to increase lending. And we know full well a Chinese stimulus package has already been delivered. Record US Treasury issuance is meeting up with a potential period of falling foreign demand for Treasuries, and we suggest China will be the key watch point in terms of this change in 2009.”
The following securities are ETFs that would be benefit in a dollar-weakening environment:
1. U.S Dollar Index Bearish Fund (UDN)
2. Short 20+ Treasury Bond (TBT).
“Without question, the most important foreign buyer of US Treasuries decade to date has been China. Although Japan is a meaningful holder, it has been a much lesser force in supporting Treasury prices decade to date than has China. We’ve told you in the past that we believe UK numbers are in large part petro money floating through one of many global financial centers that is London. Secondly, London in part and the Caribbean in better part comprise hedge fund territory. The folks currently trying to front run the Fed? Maybe. As we’ve also discussed in the past, OPEC, Brazil and Russia have one very important characteristic in common with their main land Chinese brethren – they have been on the other side of the massive US trade deficit during the current decade that is now beginning to contract. Very important recipients of trade related US dollars that have so obligingly recycled those dollars back into US Treasuries, as well as US agency and corporate debt until recently (for very obvious reasons). Looking forward, two issues stand out as we question, “who’s the next buyer?” As we question how the US will fund itself in the wholesale global capital markets, if you will. The table above shows us directly how the US funded itself decade to date. How about looking ahead?
Simply stated, we believe the question of how and at what cost the US government funds its debt expansion ahead is quite the relevant watch point in 2009. China holds a very key seat at the decision-making and ultimate outcome table. Recent Treasury yields (or lack thereof) have already reached an extreme, and as such are unsustainable. Bernanke is on record stating the Fed will buy Treasury debt if need be. Clearly, whether he realizes this or not, the markets will hold him to that statement. In fact, this may become one of Bernanke and Company’s most meaningful “tests” in the year ahead. Choosing to inflate/reflate, the Fed cannot allow nominal Treasury yields to climb meaningfully, as such we believe the financial market relief valve by default will ultimately be the US dollar. The path appears very clear. It’s only the acceleration along the path that remains in question if you ask us.
Trading Places...As we mentioned above, we need to keep a sharp eye on China as we move ahead. You know we'll be monitoring their activities in terms of capital flows, especially their Treasury purchases. But this data comes to us with a multi-month lag. So as we look ahead, we need to be mindful of combining data anecdotes in trying to anticipate change in global capital flows. Again, the reason we've spent so much time on this topic in this discussion is that any meaningful change in global capital flows into Treasuries will hopefully allow us to time a point at which Fed Treasury monetization becomes a significant reality. We know they are already monetizing alternative assets such as mortgage backed securities, commercial paper, etc. But we simply cannot see how global debt and currency markets will not sit up and take meaningful notice when Treasury monetization begins.
We hope you've noticed recent "comments" being made in the Chinese press. A number of differing officials from a number of differing Chinese government departments have alluded to dollar weakness going forward. We suggest this is no coincidence. The Chinese are "telling us" this is what they expect. Like their US official brethren, the Chinese government is "encouraging" domestic banks to increase lending. And we know full well a Chinese stimulus package has already been delivered. Record US Treasury issuance is meeting up with a potential period of falling foreign demand for Treasuries, and we suggest China will be the key watch point in terms of this change in 2009.”
The following securities are ETFs that would be benefit in a dollar-weakening environment:
1. U.S Dollar Index Bearish Fund (UDN)
2. Short 20+ Treasury Bond (TBT).
Thursday, January 15, 2009
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Saturday, January 10, 2009
Asinine, Asinine, Asinine
Obama's "American Recovery and Reinvestment Plan" states this in Appendix 1 of the plan: "We considered multipliers for the case where the federal funds rate remains constant, rather than the usual case where the Federal Reserve raises the funds rate in response to fiscal expansion, on the grounds that the funds rate is likely to be at or near its lower bound of zero for the foreseeable future."
Please tell me this is a joke. Does Obama really believe that the Fed can hold interest rates at zero for four years, and the federal government can spend, spend, spend like there is no tomorrow, while the bond market blithely looks on at $1-2 trillion federal deficits annually and the economy will begin to recover? Obama, you are kidding, right? Unfortunately, he is not kidding, yet that premise forms the foundation of his economic and recovery plan.
Rates are going up. It's just a manner of time. Treasury securities are just another bubble waiting to burst! That is why I believe in either shorting TLT or buying the double inverse ETF, TBT. I will have more information on TBT in a future post.
Source: The Market Ticker
Please tell me this is a joke. Does Obama really believe that the Fed can hold interest rates at zero for four years, and the federal government can spend, spend, spend like there is no tomorrow, while the bond market blithely looks on at $1-2 trillion federal deficits annually and the economy will begin to recover? Obama, you are kidding, right? Unfortunately, he is not kidding, yet that premise forms the foundation of his economic and recovery plan.
Rates are going up. It's just a manner of time. Treasury securities are just another bubble waiting to burst! That is why I believe in either shorting TLT or buying the double inverse ETF, TBT. I will have more information on TBT in a future post.
Source: The Market Ticker
Wednesday, January 07, 2009
Porn Industry Seeks Federal Bailout of $5 Billion
According to CNN, another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.
“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Is it the most serious thing in the world? Is it going to make the lives of Americans better if it happens? It is not for them to determine.”
Francis said in a statement that “the US government should actively support the adult industry's survival and growth, just as it feels the need to support any other industry cherished by the American people."
“We should be delivering [the request] by the end of today to our congressmen and [Secretary of the Treasury Henry] Paulson asking for this $5 billion dollar bailout,” he told CNN Wednesday.
Flynt and Francis concede the industry itself is in no financial danger — DVD sales have slipped over the past year, but Web traffic has continued to grow.
But the industry leaders said the issue is a nation in need. "People are too depressed to be sexually active," Flynt said in the statement. "This is very unhealthy as a nation. Americans can do without cars and such but they cannot do without sex."
"With all this economic misery and people losing all that money, sex is the farthest thing from their mind. It's time for congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly."
So far, there has been no congressional reaction to the request.
“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Is it the most serious thing in the world? Is it going to make the lives of Americans better if it happens? It is not for them to determine.”
Francis said in a statement that “the US government should actively support the adult industry's survival and growth, just as it feels the need to support any other industry cherished by the American people."
“We should be delivering [the request] by the end of today to our congressmen and [Secretary of the Treasury Henry] Paulson asking for this $5 billion dollar bailout,” he told CNN Wednesday.
Flynt and Francis concede the industry itself is in no financial danger — DVD sales have slipped over the past year, but Web traffic has continued to grow.
But the industry leaders said the issue is a nation in need. "People are too depressed to be sexually active," Flynt said in the statement. "This is very unhealthy as a nation. Americans can do without cars and such but they cannot do without sex."
"With all this economic misery and people losing all that money, sex is the farthest thing from their mind. It's time for congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly."
So far, there has been no congressional reaction to the request.
Tuesday, January 06, 2009
Thursday, January 01, 2009
2008 Performance Reflection
2008 has come and gone and here it is 2009. Most investors are glad to see 2008 behind them and look forward with optimism to 2009. Since this is the beginning of a new year, let’s reflect on overall performance for 2008, which turned out to be a disastrous year, third-worst year in more than a century, for most investors of our generation. Many investors are angry and confused. They are hoping for a turnaround in 2009, but considering the pain that has continued for more than a year, they are reluctant to bet on it. It was the DJIA worst year since 1931. The broad S&P 500 did even worse, down 38.5% for 2008, its worst year since 1937. However, those of you that followed the Exponential Moving Average (EMA) Trading Strategy were kept out of harms way. On January 8, 2008, the EMA strategy turned bearish; and investors should have switched from equity investments to money market instruments. By implementing this strategy on January 8, 2008, investors would have kept intact 35% of the their investment capital (1/08/08 S&P 500 at 1390 and 12/31/08 S&P 500 at 903). In other words, for every $100,000 invested as of January 8, 2008, one would have $65,000 as of 12/31/08, as measured by the S&P 500. Ouch!!!
At some point, the stock market will hit bottom and move higher. Some experts believe it happened in November. Others believes stocks will decline again and won't bottom out until later, perhaps some time in 2009 or 2010. From my perspective, that is the beauty of following the price trend and, of course, the EMA Trading Strategy. I will let the price action of the market decide when to redeploy financial assets back into the equity market.
Next week, we will look at our EMA Trading Strategy along with some individual ETFs that may have significant profit potential for 2009.
At some point, the stock market will hit bottom and move higher. Some experts believe it happened in November. Others believes stocks will decline again and won't bottom out until later, perhaps some time in 2009 or 2010. From my perspective, that is the beauty of following the price trend and, of course, the EMA Trading Strategy. I will let the price action of the market decide when to redeploy financial assets back into the equity market.
Next week, we will look at our EMA Trading Strategy along with some individual ETFs that may have significant profit potential for 2009.
Tuesday, December 30, 2008
APPALLING!!!!!!!
GMAC President Bill Muir said in a statement today: "The company won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.” The relaxed policy “will allow us to return to more normal levels of financing volume, and should help in efforts to stabilize the U.S. auto industry.” Sounds good, doesn't it? Now, according to GMAC what constitutes a "prime" customer? This means that only the best credit risks will get financed at a reasonable rate, right? Well, no. Matter of fact, GMAC reduced the credit score necessary to get a loan from 700 (very good) to 621 (not very good.) Do you believe this? I am loathed at how they are wasting my money as a taxpayer. Everyone that reads this blog should send a copy of this posting to his/her Representative and Senators demanding accountability. By the way, the median (average) FICO score in the United States is 723.
Worse, here was what GMAC did: "Within hours, GM was offering no-interest loans for as long as five years to counter this year’s 22 percent drop in sales, caused in part by the inability of its customers to get financing." Oh, and the terms? GMAC will pay an 8 percent dividend on the Treasury’s $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5 percent of the preferred-stock purchase and pay a 9 percent dividend if exercised."
So let me see if I understand this correctly. The government "buys" preferred equity that pays an 8% coupon. GMAC must pay that 8% coupon (9% if the government exercises the warrants. GMAC turns around and loans out money at 0% that it has to pay 8% to acquire, and at the same time decides that it will make loans to people with credit scores significantly worse than average, when before they would make loans only to people with scores that were slightly better than average. Loaning money out at a lower rate of return than it costs you to acquire - isn't that kind of like "we'll lose something on each sale, but make it up on volume?"
Oh, and then while we're at it, let's make lots of loans to people who have credit significantly worse than the average credit score in the United States, instead of just making loans to those who are at least average in their handling of credit."
Source: From the Karl Denninger's blog at the Market Ticker.
Worse, here was what GMAC did: "Within hours, GM was offering no-interest loans for as long as five years to counter this year’s 22 percent drop in sales, caused in part by the inability of its customers to get financing." Oh, and the terms? GMAC will pay an 8 percent dividend on the Treasury’s $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5 percent of the preferred-stock purchase and pay a 9 percent dividend if exercised."
So let me see if I understand this correctly. The government "buys" preferred equity that pays an 8% coupon. GMAC must pay that 8% coupon (9% if the government exercises the warrants. GMAC turns around and loans out money at 0% that it has to pay 8% to acquire, and at the same time decides that it will make loans to people with credit scores significantly worse than average, when before they would make loans only to people with scores that were slightly better than average. Loaning money out at a lower rate of return than it costs you to acquire - isn't that kind of like "we'll lose something on each sale, but make it up on volume?"
Oh, and then while we're at it, let's make lots of loans to people who have credit significantly worse than the average credit score in the United States, instead of just making loans to those who are at least average in their handling of credit."
Source: From the Karl Denninger's blog at the Market Ticker.
GMAC Bailout: The Sky is the Limit
According to the "Wall Street Journal," the federal government Monday deepened its involvement in the U.S. automotive industry by committing $6 billion to stabilize GMAC, a financing company vital to the future of struggling car maker General Motors Corp.
In a sign the government's role in the industry could become open-ended, the Treasury Department said Monday it had set up a separate program within the Troubled Asset Relief Program, a fund originally designed to help banks, to make investments directed at the auto industry. A Treasury official said the new program didn't have a specific dollar limit. In other words, the Treasury is saying that we don't know how much money it will take to save the financing arm of GM; but we will provide as much money (taxpayers money of course) as it takes.
The agreement opens a new rescue program for the auto industry as part of the Treasury’s $700 billion TARP. Keep-in-mind that the bailout was originally designed to buy troubled assets from banks and has instead become a fund for Treasury to prop up all kinds of lenders, insurers, car makers, and now auto-finance companies.
I am here to say that "we, as a nation, will reap what we sow." That is potential for hyperinflation and the total destruction of our currency.
In a sign the government's role in the industry could become open-ended, the Treasury Department said Monday it had set up a separate program within the Troubled Asset Relief Program, a fund originally designed to help banks, to make investments directed at the auto industry. A Treasury official said the new program didn't have a specific dollar limit. In other words, the Treasury is saying that we don't know how much money it will take to save the financing arm of GM; but we will provide as much money (taxpayers money of course) as it takes.
The agreement opens a new rescue program for the auto industry as part of the Treasury’s $700 billion TARP. Keep-in-mind that the bailout was originally designed to buy troubled assets from banks and has instead become a fund for Treasury to prop up all kinds of lenders, insurers, car makers, and now auto-finance companies.
I am here to say that "we, as a nation, will reap what we sow." That is potential for hyperinflation and the total destruction of our currency.
Friday, December 26, 2008
GMAC: One-bank Holding Company
Question: Does having a "piggy bank" allow one to seek one-bank holding company status from the Fed? This a question that I sent to my Representative in Congress. You may want to do the same, since it seems everyone is becoming a one-bank holding company.
Shocker!!! The Wall Street Journal reports that the "Federal Reserve's decision to make GMAC LLC a bank-holding company throws the unit a desperately needed lifeline, but further entangles the federal government in areas of the economy it once considered beyond its purview.
In a Christmas Eve decision, the Fed gave a present to GMAC, a finance company controlled by private-equity fund Cerberus Capital Management and General Motors Co., to qualify as a bank. As a federally regulated bank-holding company, GMAC potentially gets access to billions of dollars of Treasury funds dedicated to recapitalizing banks."
Shocker!!! The Wall Street Journal reports that the "Federal Reserve's decision to make GMAC LLC a bank-holding company throws the unit a desperately needed lifeline, but further entangles the federal government in areas of the economy it once considered beyond its purview.
In a Christmas Eve decision, the Fed gave a present to GMAC, a finance company controlled by private-equity fund Cerberus Capital Management and General Motors Co., to qualify as a bank. As a federally regulated bank-holding company, GMAC potentially gets access to billions of dollars of Treasury funds dedicated to recapitalizing banks."
Tuesday, December 23, 2008
Christmas Hiatus
I want to wish everyone who has been part of this blog over the past year a very "Merry Christmas."
2008 was not a kind year to investors of all shapes and forms who remained fully invested in this "Bear market." Most equity indexes for 2008 will be down anywhere from 40% to 50%. The S&P 500 is trading at approximately its same level as ten years ago. That really does hurt. And, keep-in-mind that just to get back to the price levels of January 2008, the market has to appreciate by 80% to 100%. However, those of you that heeded the sell signal on January 8, 2008 have been kept out of harm's way. On January 8, 2008, the exponential moving averages (14-Week in relation to the 40-Week) generated a sell signal, whereby investors were suppose to exit all equity investments and redeploy the proceeds to money market investments. For those of you that did execute the strategy, thank your blessings and be generous this Christmas with those that are truly in need.
2009 will probably not be that much better than 2008, especially the first half. However, saying that, I will let the market tell me when the trend changes from bearish to bullish through the exponential moving average strategy.
I intend to post again immediately after the New Year in which I will reflect on 2008, and look at some investment vehicles that could enhance your financial well being for 2009.
2008 was not a kind year to investors of all shapes and forms who remained fully invested in this "Bear market." Most equity indexes for 2008 will be down anywhere from 40% to 50%. The S&P 500 is trading at approximately its same level as ten years ago. That really does hurt. And, keep-in-mind that just to get back to the price levels of January 2008, the market has to appreciate by 80% to 100%. However, those of you that heeded the sell signal on January 8, 2008 have been kept out of harm's way. On January 8, 2008, the exponential moving averages (14-Week in relation to the 40-Week) generated a sell signal, whereby investors were suppose to exit all equity investments and redeploy the proceeds to money market investments. For those of you that did execute the strategy, thank your blessings and be generous this Christmas with those that are truly in need.
2009 will probably not be that much better than 2008, especially the first half. However, saying that, I will let the market tell me when the trend changes from bearish to bullish through the exponential moving average strategy.
I intend to post again immediately after the New Year in which I will reflect on 2008, and look at some investment vehicles that could enhance your financial well being for 2009.
Friday, December 19, 2008
With Economy in Shambles, Congress Gets a Raise
"A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay. Instead, they will get a $4,700 pay increase." Enough said.
Source: The Hill
Source: The Hill
Thursday, December 18, 2008
The Mother of All Bailouts: Coming to Your Local Car Dealership
Bloomberg reports that General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled tomorrow, Friday, December 19, 2008.
The Treasury Department intends to lend to the automakers through their credit arms, GMAC LLC and Chrysler Financial, to avoid having other industrial companies line up for access to the $700 billion TARP. Oh, we are all banks now!
Boston Tea Party, anyone? I am taking reservations for the tax-revolt party.
The Treasury Department intends to lend to the automakers through their credit arms, GMAC LLC and Chrysler Financial, to avoid having other industrial companies line up for access to the $700 billion TARP. Oh, we are all banks now!
Boston Tea Party, anyone? I am taking reservations for the tax-revolt party.
U.S. Conference of Mayors
CNN has reported that the U.S. Conference of Mayors went to Capitol Hill earlier this month with a report listing 11,391 infrastructure projects proposed by 427 cities. The cost, as reported, is a cool $73.2 billion to pay for all these infrastructure projects that includes plans for a polar bear exhibit, an anti-prostitution program, a water park ride, zoos, museums and aquatic centers to name a view. I don't have enough time or space to delineate the remaining 11,385.
Isn't anyone out there concerned about whom will pay for all this stuff? Then again, what's a billion or trillion or quadrillion or quintillion or sextillion or septillion or octillion or nonillion or decillion or undecillion or dodecillion or tredecillion or
quattuordecillion or quindecillion or sexdecillion or septendecillion or octodecillion or novemdecillion or vigintillion? It is just monopoly money.
Isn't anyone out there concerned about whom will pay for all this stuff? Then again, what's a billion or trillion or quadrillion or quintillion or sextillion or septillion or octillion or nonillion or decillion or undecillion or dodecillion or tredecillion or
quattuordecillion or quindecillion or sexdecillion or septendecillion or octodecillion or novemdecillion or vigintillion? It is just monopoly money.
Wednesday, December 17, 2008
Chrysler Shuts Down All Production
Starting this Friday, Chrysler will shut down all production of its vehicles at all of its 30 plants for one month, which is two weeks longer than it normally does at this time of year. Now, this is the real kicker. Workers will receive 95% of their wages during the shut down. Please tell me where is the incentive to change the status quo? Why would the UAW want to change anything when its workers can take a month off, not vacation time, and still get 95% of their salary. And, I thought they were going to remove the job bank. Sign me up, please. I want a deal like that!
The Real Great Depression
I am no longer looking at a 1929 type depression scenario as a possibility for our current financial crisis. That has now shifted to the panic of 1873, which was far worse than the infamous 1929 and included widespread civil unrest. Thanks to Scott Reynolds Nelson, who has written a very interesting article in the "Chronicle of Higher Education," entitled The Real Great Depression.
Please read the article for a good historical parallel to our current economic situation. The parallels of how that 1873 panic occurred are uncanny to today's situation, such as industrial shifts (US >> China) and easy mortgage credit (European in particular) are stunning.
Remember that those who don't know or remember history are bound to repeat it in one form or another.
Please read the article for a good historical parallel to our current economic situation. The parallels of how that 1873 panic occurred are uncanny to today's situation, such as industrial shifts (US >> China) and easy mortgage credit (European in particular) are stunning.
Remember that those who don't know or remember history are bound to repeat it in one form or another.
Tuesday, December 16, 2008
Welcome to a Free "$" Zone
I like the sound of that title -- Free Money! Who doesn't? But at what cost? Yes, there is always a cost. And, we Americans will pay a "dear" price. The cost is known as "ZIRP." (If you forgot what ZIRP is or are recent to the blog, read my post from Friday, November 7, 2008.)
Today, the Fed cut its key rate (Fed Funds) by a whopping 1%. It stated that its target is now between "0 and .25%." (Even before the cut, the effective Fed Funds rate had been trading around 0.10%.) Further, the Fed stated that it will do whatever is needed to do to end the longest recession in a quarter-century and revive credit. Also, given the current weak economic conditions, it stated that these exceptionally low levels of the federal funds rate can be seen for some time. It went on to say that it will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. To me, that sounds like desperation.
We are in our dire economic strait because of excessive credit creation, which the Federal Reserve caused, and now their solution is more of the same!
Today's fed action reminds me of the following idiom: "A Fool And His Money Are Easily Parted." Please be careful out there in these current investment environs. Don't let your emotions get the best of you. Many believe that a stock market "bottom" is in place. For me, I will listen to the market by way of the 15 and 40 EMAs. And, it is still telling me that what we have is a bear market rally. These EMAs were go enough for me back on January 8, 2008; and I am sure that they will be good enough going forward.
Today, the Fed cut its key rate (Fed Funds) by a whopping 1%. It stated that its target is now between "0 and .25%." (Even before the cut, the effective Fed Funds rate had been trading around 0.10%.) Further, the Fed stated that it will do whatever is needed to do to end the longest recession in a quarter-century and revive credit. Also, given the current weak economic conditions, it stated that these exceptionally low levels of the federal funds rate can be seen for some time. It went on to say that it will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. To me, that sounds like desperation.
We are in our dire economic strait because of excessive credit creation, which the Federal Reserve caused, and now their solution is more of the same!
Today's fed action reminds me of the following idiom: "A Fool And His Money Are Easily Parted." Please be careful out there in these current investment environs. Don't let your emotions get the best of you. Many believe that a stock market "bottom" is in place. For me, I will listen to the market by way of the 15 and 40 EMAs. And, it is still telling me that what we have is a bear market rally. These EMAs were go enough for me back on January 8, 2008; and I am sure that they will be good enough going forward.
Saturday, December 13, 2008
Outrageous Economically and Morally
"What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent. What's happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics." Jim Rogers
Wednesday, December 10, 2008
Friday, December 05, 2008
China and Korea: Currency Devaluation?
What is the likely probability that China and Korea would devalue their currencies by 35% against the dollar? And, if these countries do devalue, what is the overall economic ramifications for the U.S.? Definitely not good!
Keep an eye on the following dollar index over next couple of weeks. A price of $84 is critical. If that support is broken, there just might be something to the devaluation of the Yuan.
Keep an eye on the following dollar index over next couple of weeks. A price of $84 is critical. If that support is broken, there just might be something to the devaluation of the Yuan.
Thursday, December 04, 2008
Driving for Dollars: GM CEO Hits the Road to Washington
Is this circus of CEOs driving vehicles to Washington D.C. really going to change our minds? The people have already spoken. That is, 60% of Americans are against any type of assistance to the auto industry. They spoke against the $700 billion TARP, but Congress did not listen. Let's see what our Representatives and Senators do this time.
Wednesday, December 03, 2008
Have We, as a Nation, Lost Our Sanity?
The following chart would indicate that we have.
Essentially all of the so-called "growth" since the 1990 was in fact debt that was claimed to be growth! An analogy would be like an individual borrowing more and more money over a long period of time, spending it all, and then claiming to be "enjoying unprecedented prosperity." Insane, isn't it? But, it is so true.
Essentially all of the so-called "growth" since the 1990 was in fact debt that was claimed to be growth! An analogy would be like an individual borrowing more and more money over a long period of time, spending it all, and then claiming to be "enjoying unprecedented prosperity." Insane, isn't it? But, it is so true.
UAW Open to Changes in Contract
Let's see, giving up a job bank that consists of paying 8,000 workers a full salary for staying home -- yup, that's a real concession. I have a very simple solution why doesn't Congress ask the UAW to assist in a loan, say half of what they want. Better yet, UAW can purchase Chrysler, GM and Ford at today's capitalized valuation for approximately $6 billion.
Read an excellent article by Jay Palmer in this week's Barrons, which is entitled "A Real Bailout for Auto Makers."
Read an excellent article by Jay Palmer in this week's Barrons, which is entitled "A Real Bailout for Auto Makers."
Metal Prices Have Fallen Further than During Great Depression
The price of key industrial metals has fallen further over the last four months than occurred during the worst years of Great Depression between 1929 and 1933, according to research by Barclays Capital.
Kevin Norrish, Barclays' bank's commodities strategist, said the average fall in the price of copper, lead, and zinc has been roughly 60% since the peak in July 2008. All three metals were traded on the London Metal Exchange in the inter-war years so it is possible to make a comparison.
Prices for the three metals fell 40% from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. Lead and zinc have already lost more than they did in the 1930s, according to Norrish.
Copper was hit hardest during the Depression, despite the electrification drive in the US and the Soviet Union, falling 70% at one stage before creeping back in the mid-1930s. The reason was an 85% fall in U.S. construction, then the biggest user of the metal.
Barclays Capital said the broader equity markets are already discounting the sorts of "savage declines" in corporate profits that were last seen during the depression. Price to earnings (P/E) ratios are actually lower now than they were the early 1930s, with moves in credit spreads that suggest investors are anticipating depression-era levels of economic contraction.
And yet, Fed Chairman Bernanke, see yesterday's post, states that there is no comparison between our current economic condition and the 1930s depression. Will someone please give him a dose of economic reality.
Source: Barclays Capital
Kevin Norrish, Barclays' bank's commodities strategist, said the average fall in the price of copper, lead, and zinc has been roughly 60% since the peak in July 2008. All three metals were traded on the London Metal Exchange in the inter-war years so it is possible to make a comparison.
Prices for the three metals fell 40% from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. Lead and zinc have already lost more than they did in the 1930s, according to Norrish.
Copper was hit hardest during the Depression, despite the electrification drive in the US and the Soviet Union, falling 70% at one stage before creeping back in the mid-1930s. The reason was an 85% fall in U.S. construction, then the biggest user of the metal.
Barclays Capital said the broader equity markets are already discounting the sorts of "savage declines" in corporate profits that were last seen during the depression. Price to earnings (P/E) ratios are actually lower now than they were the early 1930s, with moves in credit spreads that suggest investors are anticipating depression-era levels of economic contraction.
And yet, Fed Chairman Bernanke, see yesterday's post, states that there is no comparison between our current economic condition and the 1930s depression. Will someone please give him a dose of economic reality.
Source: Barclays Capital
Tuesday, December 02, 2008
Bernanke says Crisis "No Comparison" to Great Depression
"Federal Reserve Chairman Ben Bernanke said Monday that the current economic situation bears "no comparison" to the much deeper crisis of the 1930s Great Depression. Further, he states that you hear a lot of loose talk, but let me just say, as a scholar of the Great Depression; and I've written books about the Depression and been very interested in this since I was in graduate school, there's no comparison."
This same "scholar (and I use the term loosely, given his track record as Fed Chairman)" said in February 28, 2007 to the House Budget Committee that he didn't consider the housing downturn as being a broad financial concern or a major factor in assessing the health of the economy." In other words, he thought the "subprime problem" was contained and under control. So, in 2007, he said that we have everything under control; and now we are to believe him when he states that there is no comparison between our current economic situation and the 1933 depression. I, for one, don't believe the man. His policy of ZIRP (zero interst rate policy) will not work. It will not eradicate all the malinvestments that must be liquidated. It will only prolong our economic pain.
Ok, what should be done by the Fed and Congress? A good start in rebuilding confidence and trust in our economic system would be the following four measures:
1. The Fed should immediately stop its ZIRP.
2. Congress should repeal Gramm-Leach-Bliley Act of 1999, which will reinstitute the Glass-Steagall Act of 1933. The Glass-Steagall Act banned investment banks, which engaged in what was perceived as high-risk securities trading and underwriting, from taking insured retail deposits. In other words, an investment bank could not be a commercial bank. That prohibition was removed on November 12, 1999 by the Gramm-Leach-Bliley Act. Since 1999, there has been a rapid convergence between commercial and investment banking. Did anyone say Citigroup, Wachovia?
3. Congress and Fed should establish the maximum leverage for depository financial institutions at 10:1.
4. Congress should direct that all assets and liabilities, no off-balance sheet items allowed, are to be consolidated upon a firm's balance sheet, and all marking methods, formulas and variables for each asset held must be disclosed accurately. I refer to this as the Transparency Rule.
This same "scholar (and I use the term loosely, given his track record as Fed Chairman)" said in February 28, 2007 to the House Budget Committee that he didn't consider the housing downturn as being a broad financial concern or a major factor in assessing the health of the economy." In other words, he thought the "subprime problem" was contained and under control. So, in 2007, he said that we have everything under control; and now we are to believe him when he states that there is no comparison between our current economic situation and the 1933 depression. I, for one, don't believe the man. His policy of ZIRP (zero interst rate policy) will not work. It will not eradicate all the malinvestments that must be liquidated. It will only prolong our economic pain.
Ok, what should be done by the Fed and Congress? A good start in rebuilding confidence and trust in our economic system would be the following four measures:
1. The Fed should immediately stop its ZIRP.
2. Congress should repeal Gramm-Leach-Bliley Act of 1999, which will reinstitute the Glass-Steagall Act of 1933. The Glass-Steagall Act banned investment banks, which engaged in what was perceived as high-risk securities trading and underwriting, from taking insured retail deposits. In other words, an investment bank could not be a commercial bank. That prohibition was removed on November 12, 1999 by the Gramm-Leach-Bliley Act. Since 1999, there has been a rapid convergence between commercial and investment banking. Did anyone say Citigroup, Wachovia?
3. Congress and Fed should establish the maximum leverage for depository financial institutions at 10:1.
4. Congress should direct that all assets and liabilities, no off-balance sheet items allowed, are to be consolidated upon a firm's balance sheet, and all marking methods, formulas and variables for each asset held must be disclosed accurately. I refer to this as the Transparency Rule.
Monday, December 01, 2008
It's Official: Economy is in a Recession
The National Bureau of Economic Research (NBER) said today, December 1, 2008, that the U.S. economy has been in a recession since December 2007. News worthy? Yes, but only a year late. Most Americans have realized this since July/August 2008; and, if you had been tracking my posts just since January 2008, you would have been keenly aware of the dire economic and financial problems facing the U.S.
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